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Platinum’s rare nature gives it additional value and appeal

Huw Daniel is the CEO of Platinum Guild International, overseeing market development activities in China, Japan, India and the USA, on behalf of the platinum producers of South Africa. Before taking up this role in 2015, Huw ran PGI USA for 12 years...

13 september 2021

Marco Carniello: We want to continue to be the engine boosting the jewellery industry

Italian Exhibition Group (IEG) is a leader in Italy in the organisation of trade fairs and one of the main operators in the trade fair and conference sector at European level, with structures in Rimini and Vicenza, as well as further sites in...

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MDPS, the Israeli start-up Fintech company from the Mazalit Group is gearing up to enter the diamond industry soon. Zeev Maimon, the CEO of MDPS is also the Founder / CEO of MAZALIT, a B2B payment platform designed and dedicated to the global diamond...

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The future for synthetics lies in that it has become possible to grow a stone you want and make what you want out of it

Alex Popov, President of the Moscow Diamond Exchange and head of the Âme jewelry brand, which uses lab-grown diamonds to produce jewelry, sat for an interview with Rough&Polished sharing his views on the coexistence of natural and man-made diamonds in...

23 august 2021

The offspring of the Great Recession: the ‘new normal’

09 december 2009

As the world marked a year since the onset of the global financial meltdown and severe recession that followed, analysts and journalists have identified a new phenomenon that is a direct result of the crisis which is being called the 'new normal', AWDC reports. It is generally agreed that this new economic order has created a new set of priorities for consumers, particularly in the United States.

Chastened by the speed and strength of the financial crisis, households appear to be radically changing their personal approaches to spending and, indeed, their entire lifestyles. Not only is ostentatious spending eschewed, even smaller-scale spending is coming under review as consumers change their way of living. The new way of thinking is that, if a cheaper or more cost-effective option exists, then why not go with that.

The Western world appears to be entering a period of new normality, with lower household debt, higher personal savings, and less consumption as a share of Gross Domestic Product (GDP). The effects of this transition will ripple through both the U.S. and the international economy. In the United States, the huge retail infrastructure will slim down as businesses shift their focus to producing more for exports.

However, given that around 70 percent of America's GDP is based on consumer activity, the apparent change in attitude is causing many economists and analysts to start wondering what the financial landscape of the future will look like. Meanwhile, marketers are scratching their heads as they try to come up with novel approaches to a challenge that many have never faced.

It has become increasingly clear that the economic downturn is fundamentally different from recessions of recent decades. This is not simply another turn of the business cycle, but a restructuring of the economic order. For many smaller firms, short-term survival is the only issue on their agenda. Meanwhile, others are trying to see through the mist of uncertainty, trying to anticipate how they should position themselves once the recovery has gained strength. The problem is that no one can say if there will be a long a full-blown recovery, how long it will take to come about and what it will look like.

Despite a return to growth, the world economy is far from returning to where it was before the crisis. Unemployment is still rising, particularly in the United States where economists believe it will not start to decline until well into next year. A huge amount of manufacturing capacity remains unused since there is little demand. Although stock markets have risen and consumer confidence is climbing, many of the sources of today’s growth are temporary and far from solid. The rebuilding of inventories which have been run down for much of this year cannot provide a boost to manufacturers' production for very long without sustainable growth.

Across the world, spending is being driven by government stimulus packages. Fiscal and monetary stimuli in the United States, Europe and China on a scale never before seen is helping to limit the damage to families and to the balance sheets of many banks, but the underlying problems have not disappeared. In America and elsewhere, household debts are the highest they have ever been, and banks need to increase their capital. That means consumer spending is going to be lower and the cost of capital will be higher than before the crisis.

Over the long term, theorists offer up two scenarios for the global economic future. One is that the world economy eventually will return to roughly to its pre-crisis rate of growth, without regaining the ground lost. That is what takes place after most financial crises, says the International Monetary Fund. The second theory, and one which is increasingly gaining popularity, is that growth permanently stays at a lower rate, with investment, employment and productivity growth all lower than before. How to deal with that, however, may involve a feat of squaring the circle that is beyond the ability of even the most brilliant financial minds: shoring up demand without creating unsustainable budget deficits, keeping unemployment in check while not inhibiting the movement of workers to new industries from old ones, and bringing about innovation and trade.

Building up demand, however, requires that indebted American consumers cut spending, while thrifty countries should spend more and save less. That also means that China needs to let its currency rise while Japan needs structural reforms to boost spending.

And that is the essence of the challenge facing the diamond jewellery sector. Americans cutting back on spending means all retail sectors are suffering, particularly jewellery which is widely regarded as a symbol of the highest form of luxury spending. Meanwhile, China has said that it has no intention of letting its currency rise, indeed it has pegged it to the dollar which is at all-time low and expected to head further down due to the superpower's fiscal deficit. And in Japan, a success story for the diamond industry for 20 years or so up until around a decade ago, successive governments have avoided carrying out structural reform.

Private spending is stubbornly refusing to budge higher in the new normal due to the public's ongoing fears for their financial future. That means the world economy will rely on government stimulus programmes for longer than is ideal. Governments will only be able to repair their budget deficits when the private sector is strong enough to carry their economies higher. Spending cuts are overdue, but governments are fearful that any reduction in expenditure and tax rises will lead to a new round of financial meltdowns and a collapse in the public's fragile confidence.

A re-setting of the global financial order is as important for the diamond and jewellery industries as it is for any other sector since it is reliant on diamond jewellery consumers buying goods on a regular basis. Although De Beers’ Managing Director Gareth Penny confidently stated earlier this year at 'Town Hall Meetings' held in the major diamond centres that consumer spending has always slowed in recessions and then risen strongly following a new cycle of recovery, not everyone is persuaded that this will be the case in 2010.

Is this just another business cycle, albeit an extraordinary one, with the usual recovery to be expected, or has confidence among consumers been shaken and a new reality created by the nature of the crisis which led to trillions of dollars of bailouts for financial institutions and injections of cash by central banks. The divergence in views can be seen in the trading patterns of the diamond industry. The rise in rough prices since the middle of 2009 shows that there are many in the industry who are convinced that we have simply passed through a deep recession and are recovering. As a result, they are willing to pay increasingly higher prices for rough diamonds.

With U.S interest rates at an all-time low, buying rough diamonds makes business sense to many. And if a new commodity boom is starting, then buying rough even at high premiums is also logical. However, there are huge uncertainties in that business philosophy since the recovery is far from certain, and only the enormous stimulus package in the United States is pulling the economy out of the mire.

For many, it makes more sense to act cautiously and wait for solid indications that diamond consumers are returning to stores. That is all the more the case if one agrees that changes in consumers' spending habits are both long term and being carried out in many cases through choice not necessity. In addition, could it be that the high spending that characterized the past two decades, and certainly the past five to six years, in the United States were not “normal” but were far beyond long-term trends? Borrowing against assets enabled consumers to spend, but when the bubble broke, the value of their assets plunged and they have been left with vast debts.

In a presentation to the World Federation of Diamond Bourses Presidents' Meeting in Antwerp in mid-November, industry analyst Chaim Even-Zohar pointed to several factors that would characterize the new normal. Firstly, there will be a continuing global de-leveraging both in industry and among many consumers. Although the diamond industry has cut debt levels significantly, further de-leveraging can be expected.

Secondly, all members of the diamond pipeline will have to alter their business models and reduce debt to equity ratios. In addition, it will be more difficult to secure bank finance and, as a result, companies are likely to have to develop new sources of finance, including from the investment community, securitizations, or raising public capital.

A third factor will be increased government regulation, while a fourth is reduced banking secrecy and tax information sharing. Governments want to discover the whereabouts of “hidden” assets in a bid to recover some of the trillions they spent on bailouts by widening their tax base. Even-Zohar said that although this hardly impacts traders, "many high-end clients require complete confidentiality of transactions. As the trading community is becoming increasingly transparent, there will be a long-term challenge on how to accommodate the multi-million dollar 'private clients'.”

A further element of the new normal is the continental shift where financial power is moving to Asia and away from the United States. Although even China and India combined cannot presently make up for the loss of business in the United States, this is a long-term movement that has received a further boost from the financial crisis.

Alex Shishlo, Editor of the Rough&Polished European Bureau in Brussels